3. Suppose that Fortnum’s has four customers: Elizabeth, Charles, Tosha,and Tim, to which they may sell two products: tea and cakes. Themarginal cost of a pot of tea is £2 and the marginal cost of plate ofcakes is £1. Their customers willingness to pay for each product is: ElizabethCharlesToshaTim Cakes87410 Tea1012144

(a) Suppose Fortnum’s sells cakes and tea separately. What price wouldthey charge for each?(b) Suppose Fortnum’s only sold “Afternoon Tea,” which is a bundle ofcakes and tea. What price would they charge for Afternoon Tea?(c) Suppose Fortnum’s offered both Afternoon Tea, as well as selling teaand cakes individually. What prices would they set?

4. Suppose there are two firms producing identical biscuits. The demand forbicycles is QD = 200 ? 4P . Both firms have an identical marginal cost ofproducing a biscuit is $5(a) Suppose both firms complete ala Cournot. What is the equilibriumprice and quantity for each firm?(b) Suppose both firms compete ala Bertrand. What is the equilibriumprice and quantity for each firm?1 (c) Suppose both firms compete ala Stackelberg. What is the equilibriumprice and quantity for each firm? 2

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